This invention relates generally to risk management in international lending and, more particularly, to assessing the risks associated with the lending on a per country basis.
Following the dissipation of bipolar international relations and the global adoption of economic liberalization, new opportunities exist for debt and equity financing in developing countries. At the same time, the domestic market has become saturated. International lending, with respect to long-term growth and profitability, has implications in the way business is done and risk is assessed. In addition to the requirement of accurately measuring projects and credit risks of new operations, the risk owing to the extraterritoriality must be considered. This risk is generally described as country or sovereign risk.
The rationale of a country risk assessment is justified, for example, by reviewing World Bank experience in the area of project finance. Unfavorable economic conditions in developing countries, overlooked adverse macroeconomic or sectoral policies in borrowing countries, overly optimistic projections on investment returns, and the tendency of World Bank management to focus on loan volume can present challenges. Of course, the World Bank's concern is not timely payment, rather it is ultimate payment. By contrast, a policy of that type would affect the income statement of a private lender. The risk is broken down into two components country risk analysis or assessment and country risk management. The objective of country risk assessment is then not to avoid risk, but to manage it prudently.